From Worst to First: Behind the Scenes of Continental's Remarkable Comeback

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CHAPTER ONE

    was going nowhere fast.

    Denver or Cleveland--or, in fact, if you wanted to get anywhere at all and get there on time--you were better off flying almost any other airline.

    And nowhere is where we could get you, though we probably would have lost your luggage on the way.

    operations at the Boeing Company in Seattle. I moved to Houston and took over as president and chief operating officer of Continental. The job looked great--president of the fifth-largest airline in the country. I knew Continental had operating problems, but then, I'm an operations guy, and solving problems is the challenge any executive looks for.

    me to leave Continental and take a similar position there, I looked at that offer as a parachute and was prepared to take it. I would have given anything to get out of Continental, which was, I had no doubt, about to crash and burn. I felt as though I had been handed the controls of an airplane that people admitted was having a little trouble. But nobody had told me both engines had failed. I could pull the yoke, push the rudders, and goose the throttle all I wanted--but, surprise! It turned out I didn't have all the controls, and the controls I had weren't connected to anything. Continental was headed for another financial and operational disaster. And all I could do was watch.

Portrait of a Crisis

Consider these statistics:

* In the years leading up to 1994, Continental was simply the worst among the nation's 10 biggest airlines, which are measured monthly according to several quality indicators by the U.S. Department of Transportation. For example, DOT measures those 10 largest airlines in on-time percentage (the percentage of flights that land within 15 minutes of their scheduled arrival). Continental was dead last.

* It measures the number of mishandled-baggage reports filed per 1,000 passengers. Continental was worst.

* It measures the number of complaints it receives per 100,000 passengers on each airline. Continental was last. And not just last--in 1994, Continental got almost three times as many complaints as the industry average and more than 30 percent more complaints than the ninth-best airline, the runner-up in lousy service. We had a real lock on last place in that category.

* It measures involuntarily denied boarding--passengers with tickets who show up at the gate but because of overbooking or other problems are not allowed to board the plane. That was our big success story: We were only among the worst there, not the worst.

We weren't just the worst big airline. We lapped the field.

    are losing baggage, and if your service is annoying your customers so badly that they feel the need to tell the U.S. government about it, it's going to show up in your financial situation, too.

    protection twice in the preceding decade. It had emerged reorganized twice, but somehow in all that time in bankruptcy court it never found the secret to making a profit. Our stock had undergone a steady decline throughout the company's times of troubles, finally settling at around $3.25 a share, where it seemed unalterably stuck. In fact, in early 1995, during our darkest days of financial crisis, we issued a press release describing our tenth consecutive year of losses. We did our best to bury the news that we were in so much trouble that we weren't just trying to reorganize our debts--we were simply going to have to stop paying some of them (temporarily, we hoped). We weren't in bankruptcy, but we wouldn't have had to change planes to get there.

    first we thought we had done a good job of hiding or softening the news, but then we figured it out. Our stockholders were just betting we'd survive. Our stock simply couldn't go any lower. It was at rock bottom.

    years (and as many different management schemes and new buzzwords), remaining employees had learned one survival strategy: Duck. No matter what management told employees they were supposed to do, it was a pretty fair guess that it was a lie. And even if direction was sincerely offered, chances were that long before anybody came around to check on whether employees were following it, some crisis would have caused yet another management change. So employees just did what they could and kept their heads down.

    management had used to keep the airline together was union busting, so our employees were paid far below industry average. Their repayment for their endurance and ability to hold on was regular layoffs, wage reductions, and broken promises on wage snapbacks and profit sharing. Our on-the-job injury numbers were astronomical; so were turnover and sick time. Employee groups fought each other for scarce resources and wages. When problems occurred, which of course they did almost constantly, covering your ass was a lot more important than solving the problem.

    insignia from their uniforms to avoid having to answer uncomfortable questions from airport coworkers or from customers when off duty. When friends asked where they worked, they'd mumble, "Um, out at the airport."

    angry employees, low wages, a history of ineffective management, and, I soon learned, an incipient bankruptcy, our third, which would probably kill us.

    headquarters, I didn't sleep real well. But to be honest, sleeping wasn't going to solve this airline's problems.

    February 1994. In June, when the United offer came, Continental offered me a pile of money to stay instead of jumping. And for reasons I'll never quite understand, I stayed on. Some of it had to do with the fact that I had lured several colleagues whom I deeply trusted and respected to join me at Continental. I couldn't see abandoning them. Some of it had to do with the challenge of trying to save a company in such desperate straits. And some of it had to do with the Continental employees, a disgruntled, angry, mistrustful but straightforward lot. For every employee who would respond to me in an understandably surly, angry fashion--"You're just like all the rest, we've had 10 presidents and we'll have 10 more and I'm sick of promises"--there were a dozen who cut right to the chase: "Help us, Gordon," they said. "Do something." They sure needed me more than a successful company like United ever could.

    officer, which meant that my hand was finally on the control. To put it in pilot's terms, I was finally sitting in the left-hand seat. I was flying the airplane.

    things are looking a little different.

From Worst to First

Starting early in 1995, a renewed focus on the flight schedule and incentive pay drastically changed our on-time performance, and since then we've been in the top five almost every month, often coming in first. Even when our planes aren't the industry leaders in on-time percentage, our lost-baggage claims are usually among the two or three best. Our consumer complaints are continually below the industry average and usually among the lowest in the industry, and we're the best in the industry at taking care of our customers when the plane is oversold. For 1996, measured as a whole, we were third best or better in all four things the DOT measures, which I liken to hitting a grand slam.

    higher-fare business passengers we most wanted on our planes. From a low of 32.2 percent in 1994, businesspeople climbed to 42.8 percent of our customer mix in 1996. And it's not just businesspeople. Now that our product is good, we've found a customer base again, which has made us profitable: In 1994, we lost $204 million; in 1995, we made $202 million; in 1996, we made $556 million. We've had eleven straight quarters of record profits.

    years has now had 11 straight profitable quarters, each of them surpassing the record of the preceding quarter.

    and, even so, now regularly trading at more than $50.

    Continental is no exception. However you measure the happiness of a workforce, ours scores high:

* Wages have gone up an average of 25 percent.

* Sick leave has gone down more than 29 percent.

* Turnover is down 45 percent.

* Workers' compensation is down 51 percent.

* On-the-job injuries are down more than half, by 54 percent.

    work, stay healthy, and pay close attention to what they're doing.

    anymore. In fact, sales of our logo merchandise to employees have gone up 400 percent.

    chose us as their stock of the year for 1995. Reporters from the Wall Street Journal, the New York Times, USA Today, Fortune, Forbes, and other publications came to Continental to write about what we were doing right. We regularly get requests to talk about how to improve quality and morale from organizations like NASA and companies like Honda.

    Magazine and the J.D. Power and Associates company awarded Continental the J.D. Power Award for customer satisfaction as the best airline for flights of 500 miles or more. In 1997 they chose us again, and we came within a hair of being named the best airline for short flights, too. No airline had ever before won the J.D. Power Award twice in a row, and we had not only done it but had almost won both J.D. Power Awards for airlines. In 1996, the J.D. Power folks said they had never before seen an airline go from worst to first in one year. In 1997, they said they had never before seen an airline win two years in a row. We were, frankly, making airline history.

    monthly, put the final stamp on our turnaround: They called us the 1996 Airline of the Year, out of the more than 300 airlines worldwide.

    service, paid its workforce badly, barely managed to hold onto disgruntled, unhappy employees long enough for them to drop wrenches on their feet and file workers' compensation claims, and lost so much money that we were perilously close to our third (and no-doubt final) bankruptcy.

    employees are better paid and happy. We're consistently profitable, and we have a billion dollars of cash on hand. We're the darlings of Wall Street, and we've made a lot of stockholders happy and rich. And we were recently the object of a bidding war between two of the largest airlines in the nation--Delta and Northwest. We used our position to avoid being gobbled up by some other corporation. Instead, we were acquired by Northwest in a way that allowed us to keep working as we have learned to work, to keep being the successful airline we have become.

You, Too, Can Save Your Company, with Employees You Probably Have Around the Shop Right Now!

So how did this all happen?

    have all the same people. We're flying pretty much the same airplanes. We're serving pretty much the same cities.

    and we're only getting better.

    Ronald Reagan, and the Pied Piper all rolled into one?

    rules, based on the most obvious understanding of human behavior.

    of 1994 and today--how a company changed from a place where everything went wrong, a place investors, employees, and most of all customers agreed they wanted nothing to do with, into an airline investors love, customers choose, and employees are proud to work for. And in fact, I'll reveal how it did more than just change--how it changed to the best airline flying.

    straight J.D. Power award, something went right. I'll tell you what I think it was--what my team and I did, what so many other new managers did, and most of all what the employees of Continental Airlines did once we proved to them we wouldn't sabotage them anymore.

    we did here is specific to the airline industry. We're in the business of taking people where they want to go, on time, with their luggage, in a safe, reliable, and predictable way. We needed to give our employees a reason to want to do that. Once we were able to communicate to them that we might actually be willing to just get out of their way and let them do that, our employees were so happy they couldn't believe it. And they showed us how good they were almost instantly.

    But once we got the managers out of their way, once we started helping rather than hindering them, once we started explaining what we wanted them to do and then actually rewarding them for doing that, we found out what I had expected in the first place.

    wants to buy you, right? Naturally, over the last few years Continental has had a lot of interest from potential purchasers. And in an era of consolidation, we knew we were going to end up connected with somebody. We didn't want to be the last ones at the dance without a partner. But we didn't want to give up what we had fought for so hard.

    from two different airlines: Delta and Northwest. Delta was going to take us over, in a traditional merger. Northwest was willing to enter into a complex and unprecedented code-sharing alliance with us, by which they'd own us but the two airlines would still function as independent but complementary companies, giving new benefits to the stockholders--and customers--of both airlines but allowing the corporate spirit we'd spent four years developing to continue to flourish. And, incidentally, ensuring that not a single Continental employee would lose a job as a result.

    returns to our shareholders while preserving the things that made us so successful. Delta offered a divisive merger that would have treated our employees unfairly and destroyed shareholder value.

    The board chose Northwest.

    Wall Street Journal reported that the chief executive officer of Delta replied, "Labor? You mean this thing fell apart over labor?"

    members and shareholders, and it isn't just our top-level managers with their incentive plans and golden parachutes. It's 40,000 people. It's all of us, working as a team. It's an entire culture, an entire way of being in business together. We fought for that, and we won.

    fixing watches, or flying airplanes. I'm going to tell you how to find your own great business and great people, no matter how deep they may seem to be buried. The people probably already work for you. And I have to tell you, nothing I can say in this book will be anything you haven't heard before. It has to do with being honest and straightforward. It has to do with hiring the best people in the business to fix big problems. It has to do with understanding your business and what's important to your customers and your employees as well as your stockholders.

    doing something to solve problems.

    and sharing that information with everyone in the company.

    respect. Those are the most important things Continental has now that it didn't have in 1994, and I've got to tell you that the minute we lose those, we're heading right back to the bottom of the heap. We can go from first to worst as fast as we went from worst to first, so I promise you I'll be practicing everything I preach here. If I don't, my employees will tell me about it--and through their service, they'll sure as hell tell you.

    at Continental--the simple, sensible changes we made at the top, how our managers let the employees turn Continental into the best airline flying, how we coped with crisis, and how we moved forward together.

    2 will explain how I got control of the airline. Getting the attention of a disgruntled and dispirited group of employees was an equally challenging project, and I'll explain that.

    four-part program that encompasses all aspects of our operations at Continental. It was the blueprint for our turnaround, and to this day it's the plan by which we do every single thing at Continental. No short-lived management mumbo jumbo, the Go Forward Plan was a complete restating of how we would do business at Continental. And we still follow it today, nearly four years later. I'll also tell you how, through all the changes, we've managed to keep things fresh and keep improving, to keep from resting on our laurels.

    learned as we took this monumentally broken company and fixed it. We'll go over some of the management lessons I've taken away from my experiences here and some of the lessons I learned before I got here that helped Continental become such a success story.

    summary of all the programs and projects we undertook that caused our success. So if you're in a terrible rush and just want a quick rundown of what we did, Chapter 14 can get you there in a hurry. But don't stop there. If you just read Chapter 14 and your friends read the whole book, when their businesses are experiencing remarkable successes and yours is just showing gentle improvement, you'll have no one but yourself to blame.

    even obvious. But maybe you'll run across a few things you've forgotten to put into practice or a few ideas you hadn't had explained to you quite right before. But I guarantee you we haven't done anything that you can't do tomorrow (or today) if you're just willing to go ahead and do it. Your employees will love you for it. So will your investors. And so will your customers.